Risky Business: Stuyvesant Town and Public Sector Pensions

NPR reports the financial collapse of the Stuyvesant Town and Peter Cooper Village renovation and the massive unfunded debt in state pensions are intertwined. When the backers of the $5.4 billion high-profile Manhattan real estate venture declared bankruptcy in January part of the reason was the collapse of California’s pension system, CalPERS, which had invested $500 million in the deal. When CalPERS assets were slashed after the financial markets tanked, California suddenly found itself with a $59 billion unfunded pension liability. Florida’s pension system also put money into what became the biggest real estate debt collapse in U.S. history.

Why would state pension managers risk employees’ retirements on high-risk investments? In pursuit of a high return, pointing to a fundamental flaw in how state and local pensions are valued and financed.

Rather than invest worker and employer contributions in lower-risk and lower-return bonds state pension systems tried to lessen the amount the government needed to contribute to public pensions by relying on a higher rate of return on pension investments. It turned out to be a bad strategy based on unsound financial economics.